The new year brings an opportunity to reflect on your current investments, analyze future outlooks and rebalance your portfolios accordingly.
The good news is analysts expect the market to continue to do well, with corporate spending and individual spending being the driving factors.
“Corporate spending has been emerging in 2017 along with solid business confidence. In fact, the NFIB Small Business Optimism Index hit the highest level since 1983 in November, which is supportive of ongoing economic growth,” says Megan Horneman, Verdence Capital Advisors’ director of portfolio strategy.
[See: 7 of the Best Stocks to Buy for 2018.]
“We also expect residential investment to support economic activity as the weather-related rebuild continues in 2018, inventories remain low, the homeownership rate has slowly been moving higher and homebuyer affordability remains above average,” she says. “Lastly, we cannot discount the positive impact from the global synchronized recovery. Nearly all major global economies are seeing manufacturing solidly in expansion territory, which should translate into robust global growth.”
But investors should still remain diligent about balancing and maintaining their investment portfolios in 2018. That’s partly because other factors, such as expected interest rate rises, political tensions, debt concerns and trade negotiations could rattle the markets. So to mitigate risk for the individual investor, next year is all about diversification, both by market capitalization and geographic region of the world.
“Diversification reduces risks and is a critical factor in helping you reach your goals. Mutual funds and exchange-traded funds are great ways to own a diversified basket of securities in just about any asset class,” says Rob Williams, a financial planning expert at Charles Schwab.
Consider the following tips to help structure your portfolio for success in the year ahead.
Stay on a long-term horizon. Think twice about buying anything you might want to get out of soon.
“We expect volatility to increase and wouldn’t be surprised to see a double digit decline at some point,” says Carol Schleif, deputy chief investment officer for Abbot Downing in Minneapolis. “But this sort of market move isn’t risky for a long-term investors. It’s a normal course correction in an upwardly trending secular market and an opportunity to put cash to work that may have been sidelined.”
Go international. By keeping globally diversified in the U.S., the EU, the U.K. and emerging markets, such as in an index fund based on the all country world index, you can get exposure to more than 99 percent of the globe’s public market capitalization, Schleif says.
“We expect global economies to continue to do well, with a quickening pace in most parts of the globe. Absolute growth could be even stronger outside the U.S., though the new tax plan may boost the U.S. growth rate depending upon how individual and business behavior changes when a final plan become law,” she says.
[See: 7 Ways to Invest for Income.]
Stay in stocks. The Federal Reserve is expect to gradually tighten monetary policy, which means Horneman favors stocks and alternatives over bonds.
“We believe the multi-decade bull market in bonds likely peaked in July 2016,” she says. “With yields still well below what economic fundamentals would warrant, interest rate risk is high for fixed-income investors.”
Instead, income-oriented investors should look to corporate bonds (specifically high-yield). Emerging market bonds should benefit from healthy corporate balance sheets, declining default rates, reform momentum, have lower durations and stable currencies.
Horneman says she also prefers value stocks over growth stocks next year. “We are in the late stages of an economic recovery and some growth stocks may struggle,” she says.
That doesn’t mean that stocks won’t see growth impacted by projected rising interest rates, however. While returns are lower overall when rates rise, some do especially well, such as those in energy, utilities, consumer goods and food, says Robert Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania.
Consider active portfolio management. Because of predicted volatility and because U.S. stocks are projected to return about 6 to 7 percent next year, active portfolio management will be more critical to achieve optimal performance, says John Anagnos of Aetolia Capital in Greenville, Delaware.
Don’t tinker too much. Regularly analyzing your portfolio and rebalancing it when needed is a good thing, but don’t overdo it, especially if it isn’t your day job.
“Many lay investors try to time the stock market, that is, they try and get into the market when stocks are going up and exit the market when stocks are going down,” Johnson says. “This strategy can, and often is, hazardous to one’s wealth.”
He cites a 2014 JP Morgan Asset Management study: if an investor stayed fully invested in the Standard & Poor’s 500 index from 1993 to 2013, they would’ve had a 9.2 percent annualized return. But trading resulted in them missing just the ten best days during that same period, then that would fall to 5.4 percent.
[See: The 9 Most Interesting ETF launches of 2017.]
“The mantra of millennial investors should be time in the market is more important than timing the market,” he says. “Long-term investors should simply follow their [investment plan] and not concern themselves with broad market moves or the crisis du jour.”
More from U.S. News
7 of the Best Tech Stocks to Buy for 2018
The Top 10 Investment Portfolio for Millennials
7 Stocks Primed for an Amazon.com, Inc. (AMZN) Buyout
How to Structure Your Portfolio for 2018 originally appeared on usnews.com